Hyperglobalization is over; geopolitics & domestic politics shape a new era of measured growth

Transcript of the lecture by Martin Wolf, Chief Economics Commentator at the Financial Times, at CCG

On February 22, the Center for China & Globalization (CCG) hosted the latest of its Global Dialogue series with Martin Wolf, Chief Economics Commentator at the Financial Times.

In his detailed examination themed "Outlook on the Global Economy in an Era of Remained Integration," Martin Wolf elucidates three principal drivers for the globalization process: economic opportunities, technological progress, and political decisions.

According to Wolf, the disparities in production costs and resource allocations across nations have historically paved the way for international trade, a process significantly bolstered by breakthroughs in transportation and communication technologies. This synergy facilitated the era of hyperglobalization between 1980 and 2008, during which emerging economies, notably China, were integrated into the global market, thereby altering global economic structures and power dynamics profoundly.

However, the pace of globalization has seen a notable deceleration since 2008. Wolf attributes this shift to the convergence of wage costs internationally and a plateau in technological innovations, particularly in transport and communication sectors. Despite this apparent slowdown, he argues that globalization has not been reversed but rather entered a phase of stabilization. Here, the growth of global trade now moves in lockstep with global GDP, suggesting an ongoing process of economic integration albeit under a new set of dynamics.

Furthermore, Wolf points out that current geopolitical tensions and domestic political challenges, especially prevalent in developed economies, pose significant hurdles to the future of globalization. The skepticism and resistance towards globalization, amplified by strategic rivalries and the uneven distribution of adjustment costs, underscore the complex interdependencies that define the global economy today. In this context, the future of globalization hinges on navigating these geopolitical dynamics, with the potential re-emergence of protectionist policies under leadership like Trump's posing risks to global economic integration, whereas a continuation of Biden's pragmatic cooperation could mitigate such challenges.

The event was broadcast the next day February 23 in English and Chinese on social media channels in China. Both recorded versions are also available on the Chinese internet.

Martin Wolf's lecture was followed by a dialogue with CCG President Henry Huiyao Wang and CCG Council experts, as well as a Q&A session with journalists. The remaining parts of the event will be rolled out soon.

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It's a great pleasure to be here. In fact, this is the last event I'm going to do in Beijing. I've already done in the last three days since I started on Tuesday, I think, four two-hour lectures and discussions, mostly at the DRC (Development and Research Center) of the State Council and the China Development Research Foundation, also at the Chinese Academy of Social Sciences, and you are the cream of this. And I canceled something this evening because I felt that I needed a break. Well, I never accepted and I couldn't get to Tsinghua. It was too complicated for a host of reasons. I've also met many people here, and I found it absolutely fascinating. And I feel that I've come to China at a sort of key moment in Chinese economic history. Let me just comment a little bit on the introduction.

Henry reminded me. I had forgotten that I was supposed to come and see you last time. I should perhaps tell you if you don't know why I left so suddenly. Because it was one of the more important moments in my life. I came here for the China Development Forum of last year. I'm not coming this year. In March of last year, after a dinner on the first night, something happened which I will not forget as long as I live, which is I left and I looked at WhatsApp, which I'm sure it probably doesn't come to get here. But anybody, you know what it is. I got a message from my oldest son who had just said, "Don't worry, Dad, Daddy, but mummy is in hospital." And so I worried like hell, and I managed to get through to him. And it turned out she had an extreme medical emergency, had to be operated on immediately, and it was without a doubt a matter of life or death. And so I went back as quickly as I could. And the good news is, from my point of view, the operation was successful, she survived. It's been a long convalescence because, like me, she's not very young anymore. But since this is a woman who has been my principal love for 56 years and my wife for 53, that was pretty important, even more important than staying in China. So that explains why I left so suddenly, and I think never before in my life have I had such a profound realization of what really matters.

Now, I have given a lot of presentations by now and had a lot of discussions and I really prefer the discussion. So I don't want to speak for very, very long. But I thought since this is the Center for [China and] Globalization, I'll talk a little bit about what I think about globalization today. The talks I've given, by the way, were on the state of the world economy. That was an hour. The second one was China's macroeconomic position in the world economy relating China's macroeconomic imbalances to global imbalances. And the one today was on China's relationships with the U.S. and Europe. So I've covered a lot of ground.

But let me focus on the globalization aspects of this, which is mostly what I talked about today. And I think it is also something I covered in a quite good article I wrote for the Financial Times at the beginning of this year for the special supplement we write every year for the World Economic Forum in Davos in Switzerland. That's this thing called the World Economic Forum, which is where all businesses interested in globalization tend to be, including quite a lot of Chinese. And this is basically what I said.

So let's start with the underlying drivers of the globalization process. And there are essentially three economic opportunities which can be analyzed best in terms of standard economic models. I'm not going to go into details, but the core one even now would be Heckscher-Ohlin, as it's called, which is about resources and costs.

There are opportunities to trade which are determined by divergencies in costs of producing things in different countries, which are to do, broadly speaking, with relative resource abundance and know-how - that combination of those two things. Sort of like the economic opportunities in a given period determined by the spread of know-how and resource abundance.

The second factor, which is of course not independent, is the technologies that govern transport and communications. So there were theoretically huge opportunities to trade in the early 19th century in commodities produced in land-abundant areas of the world to land-short areas of the world, but none of that was realizable until somebody invented the steamship. Transporting bulk commodities in sailing vessels wasn't very practical. I assume, though I've never really known, that one of the reasons that China so famously in the 14th century decided to stop its huge treasure fleets is they decided they just weren't very profitable because it took a lot of money to build these things and there wasn't much to trade which was going to be very valuable to China. And that depends a lot on technology.

The final element is policy and politics. Do countries want to engage with the rest of the world for whatever reason or not? Those are the things that matter.

And the fundamental point I made. I'm not going to go [into details]. But if you look at the last two centuries or so, we see two things. I could go through many dimensions, but we see basically two things, the general thrust of global economic integration is upwards. In the very long term, there's a very clear arrow up over time. And one of the simplest ways of measuring this - and I have a lovely chart on this - which is the ratio of world trade to world GDP. And we haven't had data for this - not perfect - from the early 19th century. We invented some of it, but it is there.

Back in 1840 or so the ratio was 5%, and now it's about 30%. So that's a pretty massive change. But it fluctuates enormously over that period. And what's that about? The economic opportunities on the whole clearly grew. I'll come to this more in detail. But politics and policy led to vast fluctuations and the most important downward fluctuations occurred between 1914 and 1945, during which the major Western countries got engaged in two world wars and the Great Depression. And they were the dominant global economic forces at that time. China was largely outside the world economic system for a whole host of reasons, which I don't think I need to go through.

So the general thrust is up. And a particularly important period, from this point of view, by most measures, the most dynamic period of globalization in world history started roughly in 1980 and ended in about 2008. There was a huge upswing in trade/commerce integration from the Second World War onwards, but most of that was among the developed high-income countries. What changed in 1980 was that a number of very important emerging and developing countries joined in, and of course the most important of those by far was China. So globalization went global in a way that never before done, more, far more than in the imperial period of the late 19th and early 20th centuries. And that led to the extraordinary explosion of globalization on every dimension, not just trade in goods but trade in services, movements of people - quite an interesting rise - movements of data, movements of technology, movements of capital in that period.

One of my friends, an Indian economist called Arvind Subramanian, whom you must know, described this as the era of hyperglobalization. He said this occurred. Now why did that era happen? Well in this article I referred to, the basic argument is that the three drivers I described all work together, they all work together.

First of all, by 1980, which was after a period when most developing and emerging countries had closed themselves off from trade. China was largely closed; China did very little trade before 1978. I mean really. India's ratio of trade to GDP was about 4%. It was just nothing because they had constantly closed themselves off from trade. The South Americans ditto, which used to be very open 50 years earlier, had closed themselves off from trade. The only exceptions were a few very small countries like South Korea, which was very open. So the first thing was, as a result of that, you had huge reservoirs of abundant labor above all - the crucial resource was abundant labor - which had not engaged in trade. They hadn't engaged in trade for a very long time if ever.

And from 1978 onwards, increasingly in the 1980s and onwards, this all changed. They opened up and they joined the world trading system. This allowed those resources to be used. And that reflects on the policy point that I made and the resource availability. These huge gaps in labor costs presented an enormous opportunity for increased trade. And I really don't need to explain this to China because that's a big part, not the dominant part, but a big part of China's success.

And of course, that opportunity went along with another aspect, which is the relatively free movements of capital and know-how, [which] allowed all this abundant labor in China, but also in India to a lesser degree, to be used in globalization. That's what happened.

And then there was an additional thing which was technology. By that time, advances made in shipping, the most important being the invention of the container ship some time before; in aviation, the invention of the large jet in the late 60s, early 70s; And crucially, the invention of the Internet allowed the integration of production systems organizationally and, in terms of transport, to a degree never allowed before. So everything came together - resources, policy, and technology - to generate this utterly explosive growth of world trade, which we call the high era of globalization.

Now since 2008, this period of hyperglobalization focusing on trade has clearly ceased. But, and this is a crucial point, it doesn't mean globalization is actually decisively reversed. If you look at the data, it hasn't. I've got one other big point to make before I conclude, but let me just spell that out a little. If you look at the statistics in aggregate - I'm not going to go because there are so many components of all this and I don't have time to go into it, but if you look at the statistics and sata in aggregate, what has happened since 2008 for trade particularly is that prior to then, trade was growing about twice as fast as world GDP, roughly. And since then trade has grown roughly in line with GDP. It is still true today that we do more trade with one another across the world - and it's true of China too - we do more trade with one another across the world than we have ever done prior to 2005-2008. We are still very open. So people who say globalization is ended, in terms of levels, this is not true; In terms of change, it is true.

So the era in which we integrate more and more is over. If you look at other areas of globalization, capital flows have clearly diminished somewhat, particularly capital flows from developed high-income countries into emerging and developing countries, and particularly of course, vis-a-vis China. The services trade is still exploding. Data flows continue to rise far faster than world output. In data terms, we're integrating all the time, which is a very important thing. Data is flows of facts, information, and ideas, so those are flowing pretty freely and I imagine even into China, despite the controls.

So we haven't ended globalization, but we have ended hyperglobalization. So I want to discuss why, if that is ended, and what it means for the future - that was what we end.

So I think that the best way of thinking about what has happened is in terms of my three things. It's not, as far as I can see, mainly about protection. It might be in the future, but it hasn't been so far. I think there are two more important things that have been happening between 2008 and today.

First, the underlying economic opportunity has diminished. Because, to take the most important player in all this, China, wage costs have very substantially converged. The enormous advantages of limitless free cheap labor that China seemed to offer the world in 1980 are no longer the situation today because China's relative prosperity and wages have exploded and no other country comes close to being able to provide the abundance of cheap labor and efficient labor that China could. Even India is not in that class; it's not organized that way. So that opportunity is gone.

Second, the unbundling of supply chains reached a natural limit. There are costs to unbundling supply chains. There are transaction costs, there are oversight problems, complexity costs. And beyond a certain time point, companies over 30 years have worked out how to do it. So even within Europe which is a highly integrated cross-border system and there's no protection, it just stopped growing. Because we've exhausted. And in addition, there have been no massive improvements in communications and transport costs and we've exhausted most of the ones we used, particularly on transport. There have been no profound transformations in transport costs really since - how far back ago - for the last 40 years or so. Transport technology is basically unchanged. Communication costs have improved, but from the point of view of business, the Internet has already been doing that for now for 25 years. That's slightly exaggerating, but we've exhausted these opportunities.

It's not easy to see in the data in aggregate ways in which protectionism made a decisive difference. The most important form of protectionism was, of course, the Trump tariffs on China, and the remarkable thing is how little effect they had. This is pretty striking. It is true, however, - that's a last comment on that - that we haven't liberalized anymore. And that was another way in which we exhausted past opportunities.

The last big liberalization in the world system for globalization was China's entry into the WTO. And that happened 23 years ago. Nothing big has happened since that. That helped China's trade growth in the first ten years of this century, but again it's been exhausted. All subsequent liberalization efforts basically amount to very little. So for these reasons, I'm suggesting there are perfectly natural reasons, perfectly explicable reasons why globalization has, as if it were, slowed. The way I put it, it is resting; it is coincé.

Now the question that we end with is, are we now on the verge of a really significant collapse? And this comes down to the recent politics surrounding globalization principally in the U.S. and to a lesser degree in Europe. And since these things have only begun to happen and their effects in gross trade are relatively limited, it's difficult to know how far they will stretch. But I will make 2, 3 points about where we are on this, and then I will conclude.

First, there's no doubt that - this is one of the great ironies of my life. So I've been working on trade and development since the 1970s. I'm a very old person. Back in the 70s, I worked on this for the World Bank. And my main job was to persuade emerging and developing countries to open up and exploit globalization. And they all thought globalization was an advanced country plot to exploit them, including here, right? That was the consensus. And slowly and steadily, the achievements of successful small economies like South Korea and Taiwan, and of course, Hong Kong and Singapore, one or two others, persuaded people: maybe you can get rich this way. And my understanding - I have no idea - is that that even persuaded the Chinese leadership that, why couldn't we do this? And it even persuaded India, which is fantastically protectionist and the most in Latin American countries. And the most open Latin American country became Chile and it was the most successful. So the whole mood in emerging and developing countries in the 80s and 90s changed. And they were so successful that they imposed massive adjustment costs which were not expected on the developed countries.

So now, everything I started with is completely inverted. By and large, emerging and developing countries still think trade is pretty a good thing because it's done rather well for them. But in developed countries, notably including the U.S., they think it's a plot against them even though they pushed it for half a century and they were right. So that's the big reversal.

Why have they turned against it? Well, because it imposed adjustment costs upon them, which they handled very badly and which they blamed on foreigners, particularly Chinese but not only Chinese; and because they wouldn't be prepared to confront the domestic issues in the way their economy and politics work which failed to ensure that the benefits of trade were widely shared. So that is, in a nutshell, the theme of my latest book, "The Crisis of Democratic Capitalism," which by the way I'm pretty sure is not going to be translated into your Chinese because it's got "democracy" in the title. But you can all read it in complex Chinese because you can guess where it is being published and I assume you can get hold of it. But I have no idea about that.

But anyway, the point is, as a result, demagogic politicians, particularly Donald Trump, have exploited the anxiety of people who feel they have suffered from globalization to be protectionist and to oppose further trade and blame everything that's gone wrong with them, above all, on China. That's very clear. It's always easier to blame foreigners than to blame oneself. Pretty standard. That's human. I assume it happens even here. But anyway, it certainly happens in America and to some degree in Europe - lesser degree; we're happier with trade. That's the first and biggest thing.

And the second thing that is really big is a different adjustment, a much more profound one. Always possible that the Americans have woken up and realized that China is a great power, which was inevitable - if China was successful economically, it would become a great power. And they find this very, very difficult to handle. I accept. I've always accepted that great powers tend to have rivalries with one another. That's what they do in an open-world system. And China, of course, now in a way that it has never been in the past, is part of an open-world system. It isn't a remote and distant [place] protected by its enormous sheer distance from all the other major centers of the developed population. It is now part of an integrated world system because that's what technology has done. It's made the world very, very, very small.

There's a wonderful story - I'm sorry I'm talking for much longer - that just suddenly reminds me. Back in the 13th century, I think, a few European travelers came to the courts of the great Kahn. Well, Marco Polo was supposed to have come here but [it was] in Central Asia. It took them two years to get here. Two years. And two years to get back. Well, now it takes eight hours. It's a difference, right? So we're on top of each other.

This is the first two breakdowns. Economic adjustment costs mishandled. Great Power Relations.

And into this occurs other realities which is deep political fault lines in various parts of the world. And we've seen two of them very visibly now associated with the collapse of empires. The Russia-Ukraine War is basically the consequence of the collapse of an empire. The Middle East's endless wars are the product of the collapse successively of two empires: Turkish Empire and the British Empire. And managing regions where this external force disappears turns out very often to be very, very different. Another huge fault line which is a result of the collapse of empires is Pakistan and India. I could go through many. So geopolitics, geopolitical stresses, and domestic political stresses are making international relations very difficult, then destroying the basis of harmonious competition.

Here I will get to the very last. I won't go into Europe; we can discuss that. The U.S., I think, under the Biden administration is trying very, very hard, and I give them some credit for this even though they're breaking lots of rules, to contain the results of these domestic pressures applied to the middle classes and security anxieties, decline of relative power that when Jake Sullivan says, "We are trying to build a high fence but with a small yard," I think he means it. I've talked to them. I know these people. They don't want open-ended conflict with China. They want a deal which narrows things - very uncomfortable for China; I understand that completely. But they want trade to continue and they want to be able to do deals with China on very important joint interests like climate which this administration believes in and other things.

So if they remain in charge, I think the picture I presented at the beginning should survive and we could continue to have a functioning global order though with complications as there's these big difficulties over the chips, over semiconductors, a few other high-tech areas. There are going to be conflicts over Chinese exports of electric vehicles for sure, how China handles its adjustment problems…It's manageable.

If, however, we get a Trump administration, things could start blowing up. We know that. He's proposing a very aggressive trade policy. And if this then gets into becoming a geopolitical conflict, even a military conflict among the superpowers, between the superpowers, the world is completely changed.

So at the moment, I would say, we're not in a deglobalizing period; globalization is still pretty powerful; there are strong stresses upon it, particularly from the high-income countries. Some of them have to do with domestic adjustment problems mishandled; some of them to do with shifts in relative power. But I think the leaders of the major Western countries in Europe and America want to contain the outcome and do not want a collapse in trade, in finance, or in international relations more broadly, but that cannot be guaranteed. There are profound risks in the system, which mostly originate from the side of politics. And that's what happened in the interwar period.

I talked for much longer than I expected to, as I usually do, for which I apologize. But that's what I have to say.

Again, Martin Wolf's dialogue with CCG President Henry Huiyao Wang and CCG Council experts, as well as a Q&A session with journalists. The remaining parts of the event will be rolled out soon.